(Represents MCX-SX in the matter against SEBI.

Views expressed here are personal)

For the last 20 years post liberalization we all have been propagating an open economy and selling the India Story to attract much needed capital for this Country. Instead of taking India to the next level of progress, the much awaited Jalan Committee report on Stock Exchange Ownership in India: Rules, Regulation and Policy surely must have sent shivers down the global investor community, who have invested in existing Indian Stock Exchanges. The Jalan Report, if I may say so, has proposed to almost kill competition, destroy Global investor confidence and moreover acts against the India Story! Hence all concerned are not only shocked and surprised, but also stunned by its recommendations.

Stringent entry norms, difficult fund raising and virtually no exit! is what can be deciphered as the main thrust of the Jalan Committee, all in the guise of being a public utility! We as a nation have come a long way from this argument of public good (produced, controlled and regulated by Government), due to which we set up public sector undertakings and have now, for last 20 years, got them privatized. Since they have been listed and governed by market forces, these entities have been able to do more public good than what they have done in the past. Do we expect any serious investor to play the anchor role in a Stock Exchange, knowing that this risk is not going to be rewarded through market exit, and profits will be capped? Forget getting any new anchor investor for setting up new Exchange, how can any existing exchange raise capital to address its financial needs? By keeping entry restricted to only banks and FIs, all have to wait for a bank which can set apart huge financial resources to establish a new stock exchange which has no profit model? All is not well certainly with the recommendations of Jalan committee, who saw the fruits of competition in the banking sector during his tenure as governor of RBI but is recommending contrary view in capital market.

The first debate on ownership started in 2002 with Kania Committee. Nearly 19 Stock Exchanges complied with this requirement by reducing the ownership of brokers to 49% and increasing public ownership (ownership by non-trading persons)to 51%. It was natural to expect Jalan committee to take into account the progress made by recommendations of Kania committee and then suggest the path for taking Exchanges to the next level - for making Exchanges independent for their resources as they get into new realm of expansion and technology absorption to become globally competitive. However, sadly, the committee has taken the Stock Exchanges back to the era of a controlled economy as against the spirit of liberalization and globalization that has been pursued since 1991.

The committee has, without spelling out reasons, made recommendations which would protect and preserve monopoly. This is against the general view of any aam admi enjoying the real benefits of competition in telecom, banking and insurance sectors. The Reserve Bank of India is considering bringing

in more private players in the banking sector towards achieving 100% financial inclusion in the country, and the insurance regulator endorsing listing of insurance companies to help them in raising capital. Telecom is one of the sectors in India that hit international standards, competition is seeing the end of STD calls and the regulator is looking for further intense competition by mobile number portability and wants to bring differentiation through services of operators.

Competition between exchanges is severe in countries like United States and in Europe. New regulations like Mifid and Regulation National Market System (RegNMS) are brought in Europe and United States only to build up competition between exchanges and to bring a level playing field for smaller platforms well known as ECNs in US and MTFs in Europe. There are over 75 active alternative trading platforms in United States operating in conjunction with 14 national securities exchanges. New exchanges like Bats and Edgedirect in USA are finding their way with their innovation and modern technology, while old exchanges are gearing up and partnering or acquiring technology to withstand the new demands from the participants. NYSE acquired Euronext, while NASDAQ merged with technology company OMX to withstand competition through modern technology. All this requires large resources and this is being raised from market as Exchanges are listed.

Indian capital markets which due to lack of competitive environment has not been able to create a new generation of intermediaries in tier two and tier three cities with support system as good as tier one cities. In fact amongst all Stock Exchanges, only one Exchanges accounts for 98% of total equities and F&O market turnover and most products are available only on one Exchanges and many products have not been introduced or introduced but not succeeded. Each service and intermediary in the supply chain can grow depending on the size of market and the business or revenue available in the system. The vicious cycle is of low investors base feeds into low demand which feeds into low capital raised and so lesser exchanges and lesser revenue. No one in the value chain can independently break this cycle and therefore, the change has to happen from the nodal point which is an Exchange. NYSE has invested in 104 subsidiaries to enrich the ecosystem with all needs of all stakeholders. CME has creates 42 subsidiaries for similar purpose. One of the most important investment is in technology related subsidiaries as Stock Exchanges are highly technology intensive and need specialized technology. Similar is the case in European Exchanges.

If the Exchange is strong and well capitalised, then it will offer better technology for accessibility, better service, deeper penetration, greater investment in education and awareness creation to generate more users and better product offering which in turn will create a unique space for this Exchange. This is the same story as telecom or airline sector. Any amount of capital in one airline or telecom company would not have brought the change that competition could bring and market provided the capital. We need the same in Exchange space and success will be tested by market forces and those who fail will align with stronger players and that is the self correction rule of the market for any industry including

banking. The committee completely missed to understand and highlight the challenges facing Indian Capital Market and therefore the context in which it should have suggested the issues of ownership and governance of stock Exchanges.

While the Jalan committee presses for angel role by only FIs and banks, it wants to cap the profits and not allow Exchanges to be listed. This recommendation does not take into account the fact that many original shareholders banking and financial institutions which were shareholders of existing Exchanges have sold their shares in such Exchanges even before listing. Setting up of exchange is not an easy job which requires huge investments over and above Rs.1000 crore and yet its success is not sure as seen in OTCEI which was completely promoted by financial Institutions and Banks but failed. The new exchanges have to bring in much more capital than the older counterparts, who have been investing over the years, to be ahead in technology and be competitive. Further, as Exchanges are infrastructure institutions, they require large capital and have long gestation period and, therefore, the losses during the initial years in competitive environment put additional strain on a new exchange.

The Jalan committees ignorance on the fact that existing Exchanges have received over Rs 10,000 cr capital post implementation of Kania committee which recommended existing Exchanges to be a normal corporate entity is also puzzling. The existing investors in exchanges like NSE and BSE are suffering after the pronouncement of the Jalan committee recommendations of not listing an Exchange and capping of profit. Not listing of Exchanges would, (a) prohibit many opportunities for an Exchange like, preventing them attracting various types of capital, strategic shareholders, establishing strategic alliances with global exchanges through cross participation in equity, etc, (b) make existing investors move out of existing investment in Exchanges at a huge discount which would in turn further affect the future fund raising capacity of Exchanges.

Trading platforms, like, Turquoise promoted by seven leading investment banks failed and within two years was sold to its principal opponent, London Stock Exchange. Such innovations and consolidation exist only when risk taking is allowed through forces of market. It is not prudent to depend on only FIs and banks to establish an exchange irrespective of its performance. OTCEI is still being sustained with no business on it for more than a decade as the names of the banks associated are too big to allow it to close. If we do not let market forces play then such emotional considerations will play at the cost of efficiency.

Not allowing exchanges to list citing conflicts of interest as the only cause creates further barriers for new exchanges. After the era of demutualization of exchanges, listing is seen as higher regulatory development an orbit shift in transparency of Exchanges. We can find listed exchanges even in

countries like South Africa, Malaysia, Japan, Singapore and UAE. Of the top 20 stock exchanges, most of them are listed entities. Several options have been founded to tackle the problem of conflicts of interest in case of listed exchanges in the both developed and emerging countries. There is absolutely no rationale in not allowing exchanges to list. Studies by Institutions, like, ADB, IOSCO, OECD and by many academicians of leading management institutions have shown that listing of Stock Exchanges has benefited market and created a more resilient market structure. The entire crisis of 2008 affected OTC markets and banks and financial institutions but not the stock Exchange functioning. Modern Economics believes in free markets and competition an elixir to many problems.

Hopefully, the policy makers show this report its right place and re-consider the whole issue simply on the following two moot points:

1. What are the inefficiencies and gaps in the Indian capital market which are required to be bridged to steer the Indian economy to a sustained 9% growth and meet the capital needs of infrastructure and SME and industry at large.

2. What is the need for capital in stock Exchanges, Depositories, Clearing corporations, Brokerage houses and other ecosystem support agencies which can meet the gaps in market (Sr.No. 1) provided if the capital market is allowed to grow.